Post on 03-Nov-2014
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Chapter 6Competitive Strategies
Moses Acquaah, Ph.D.377 Bryan BuildingPhone: (336) 334-5305Email: acquaah@uncg.edu
Lecture Objectives
(1) Review the concept of competitive advantage & explain its importance
(2) Define competition & describe how a firm’s competitors can be determined
(3) Explain how resources & capabilities can lead to competitive advantage
(4) Explain the relationship between competitive advantage & competitive strategies
Lecture Objectives (Cont’d)
(5)Discuss Porter’s generic competitive strategies
(6) Describe the new perspectives on competitive strategies
(7) Describe how a firm’s competitive strategy is implemented
(8) Discuss the various competitive postures and actions firms can take to defend or attack rivals
COMPETITIVE ADVANTAGE AND HOW IT IS OBTAINEDCompetitive Advantage
What sets an organization apart -- competitive edgeControlling or having something others do not haveDoing something better than other organizationsDoing something other organizations cannot do
Competitive strategies are designed to exploit an organization’s competitive advantage
Implies there are other competitors also trying to develop competitive advantage & attract customers
Competitive advantage can be eroded easily (& often quickly) by rival’s actions
Understanding the Competitive Environment
What is competition? When organizations battle for some desired
object or outcomeCustomersMarket shareSurvey rankings Needed resources
HypercompetitionA situation of intense and continually increasing
levels of competition in today’s business environment
Understanding the Competitive Environment
Who are our competitors? -- 3 Perspectives (1) Industry perspective
Identifies competitors as firms that are making the same products or providing the same service
Describes industries according to number of sellers & the similarities or differences in the products or services
• The number of sellers & level of product-service differences will affect how intensely competitive the industry is
• See Figure 6-2
Who are our Competitors?
(2) Marketing perspective Competitors are firms that satisfy the
same customer needs Intensity of competition depends on
How well the customer need is understood or defined
How well different firms are able to meet that need
Who are our Competitors?
(3) Strategic Group Perspective Competitors are firms that follow similar
strategies Strategic group is a set of firms competing
within an industry that have similar strategies & resources
An single industry could have a few or several strategic groups depending on what strategic factors are important to different group of customers
Who are our Competitors?
Strategic Group Perspective (cont’d) Firms in same strategic group have two or
more competitive characteristics in commonSell in same price/quality rangeCover same geographic areasBe vertically integrated to the same degreeHave comparable product line breathEmphasize same types of distribution channelsOffer buyers similar servicesUse identical technological approaches
Who are our Competitors?
Strategic Group Perspective (Cont’d) Constructing a strategic group map
Identify competitive characteristics that differentiate firms in an industry from one another
Plot firms on a two-variable (X-Y) map using pairs of these differentiating characteristics
Assign firms that fall in about the same strategy space to same strategic groups
Draw circles around each group, making circles proportional to size of group’s respective share of total industry sales
Who are our Competitors?
Strategic Group Perspective (Cont’d) Guidelines for constructing SGM
Variable selected as axes should not be highly correlated
Variables chosen as axes should expose big differences in how rivals compete
Variables do not have to be either quantitative or continuous
Drawing sizes of circles proportional to combined sales of firms in each strategic group allows map to reflect relative sizes of each strategic group
If more than two good competitive variables can be used, several maps can be drawn
Strategic Group Map of Competitors in Video Game Industry
Overall Cost to Players of Video Games
Low Medium High
DistribnChannels
OnlineSites
Consoles
Arcades
HomePC’s Sony
SegaNintendo
etc.
Arcade operators,Coin-operatedmachines
MSN gaming ZoneAOLHEAT
Publishersof games onCD-ROMs
Resources, Capabilities & Competitive Advantage (CA)
Every firm has resources & work processes Systems to do whatever it’s in business to do
But not every firm is able to Effectively exploit its resources & capabilities Obtain resources & capabilities it needs
Some firms are able to “pull it together” & develop distinctive capabilities, others don’t
Competitive advantage implies gaining the edge on others – using resources & capabilities
As firms strive for sustainable CA, stage for competition is set - intense, moderate, low
Competitive Advantage & Competitive Strategy
What is competitive strategy?• Consists of business approaches to
– Attract customers by fulfilling their expectations
– Withstand competitive pressures– Strengthen market position
Exploits competitive advantage byfinding ways to use resources & capabilities
to set firm apart from competitors
PORTER’S GENERIC COMPETITIVE STRATEGIESCompetitive advantage come from one of
two sources: Having the lowest cost in the industry Possessing a product or offering a service that
is perceived as unique in the industry
Another important factor is the scope of the product-market (broad or narrow)
Mix of these factors provide basis for Cost leadership strategy (low-cost strategy) Differentiation strategy Focus strategy
PORTER’S GENERIC COMPETITIVE STRATEGIES
MarketScope
Competitive Advantage
Low Cost Differentiation
Broad
Narrow
Cost Leadership Differentiation
Focus(Low Cost)
Focus(Differentiation)
Cost Leadership Strategy
• Objective:– Gain sustainable competitive advantage over
competitors, using low-cost (not price)– Produce for broad customer base
• Basic Theme (Keys to Success):– Low-cost relative to competitors
Low cost implies OVERALL LOW COST Not just low manufacturing or production
cost Product quality cannot be ignored
Characteristic of Cost Leaders
Champion frugalityStrict attention to production controlsRigorous use of budgetsLittle product differentiationLimited market segmentationEmphasis on productivity improvementsDistinctive capabilities found in
manufacturing & materials management
Successful Pursuit of Cost Leadership Strategy
Every strategic decision is aimed at keeping cost as low as possible
Efficiency is sought in all areas of operation All functional strategies & capabilities are
directed at efficiencyDoesn’t have deep & wide product linesMarket products aimed at “average”
customerLittle or no product frills or differences
When Cost Leadership Works Best
– Price competition is vigorous– Product is standardized or readily
available from many suppliers– There are few ways to achieve
differentiation that have value– Most buyers use product in same ways– Buyers incur low switching costs – Buyers are large and have significant
bargaining power
Competitive Strengths of Cost Leadership Strategy
RIVAL COMPETITORS - compete using low price
BUYERS - nullify power to drive down prices
SUPPLIERS -Flexibility to cope with input cost increases
POTENTIAL ENTRANTS - More efficient (through EOS) & pricing power
SUBSTITUTE PRODUCTS - Potential use of low price
Drawbacks of Cost Leadership Strategy
• Being overly aggressive in cutting price• Low cost methods are easily imitated by
rivals• Becoming too fixated on reducing costs
and ignoring– Buyer interest in additional features (tastes)– Declining buyer sensitivity to price– Changes in how the product is used
• Technological breakthroughs open up cost reductions for rivals
Differentiation Strategy
• Objective– Offering products/services perceived as
unique over the brands of rivals in an industry
• Keys to Success– Offer products/services that create value to
customers– Offer products/services not easily matched
or easily copied by rivals– Not spending more to differentiate the firm’s
products or service than the price premium that can be charged
Differentiation Themes
• Unique taste -- Dr. Pepper• Special features -- America Online• Superior service -- FedEx, Ritz-Carlton• Spare parts availability -- Caterpillar• More for your money -- McDonald’s, Wal-Mart• Engineering design and performance -- Mercedes• Prestige -- Rolex• Quality manufacture -- Honda , Toyota• Technological leadership -- 3M Corporation, Intel• Top-of-the-line image -- Ralph Lauren, Chanel
Benefits of Differentiation
• A product / service with unique and appealing attributes allows a firm to
– Command a premium price and/or– Increase unit sales and/or– Build brand loyalty
= Competitive Advantage
Characteristics of Successful DifferentorsEvery strategic decision & action is
directed at setting the firm apart from competitors
All functional strategies & capabilities are aimed at isolating & understanding specific market segments & developing product features that are valued by customers
Has broad and wide product lines -- many different models, features, price ranges, etc.
Characteristics of Successful Differentors
Has many market segments & product features
Controls costs but not as rigorous as the cost leader to preserve source of differentiation
Strives to establish brand loyaltyCompetitive capabilities tends to be in
marketing and research & development
Competitive Strengths of Differentiation
• RIVAL COMPETITORS - Brand loyalty & lower sensitivity to price
• BUYERS - lack of alternatives & low sensitivity to price
• SUPPLIERS - High margins provide ability to pay increases in input costs
• POTENTIAL ENTRANTS - Buyer loyalty & uniqueness of product/service
• SUBSTITUTES - lack of comparable features and customer loyalty
When Differentiation Works Better
• There are many ways to differentiate a product that have value and please customers
• Buyer needs and uses are diverse• Few rivals are following a similar
type of differentiation approach• Technological change is fast-paced
and competition is focused on evolving product features
Drawbacks of Differentiation• Trying to differentiate on a feature buyers do not
perceive as lowering their cost or enhancing their well-being
• Over-differentiating such that product features exceed customers’ needs
• Charging a price premium that customers perceive is too high
• Failing to signal value• Not understanding what customers want or prefer and
differentiating on the “wrong” things• Low-cost strategy can defeat a differentiation strategy
when customers are satisfied with a standard product and do not see extra attributes as worth paying for!
Focus Strategy
Firm pursues either a cost leadership or differentiation strategy but in a narrow customer group of segment
Concentrates on serving specific market niche Geographical area Type of customer -- specific group of
customers Specific & specialized product line
Focus Strategy
Objective Serve the niche customers better than
competitorsKeys to Success
Choose a market niche where buyers have distinctive preferences, special requirements, or unique needs
Develop unique capabilities to serve needs of target buyer segment
Focus Approaches
Approach 1: Cost Advantage Achieve lower cost than rivals in serving
the specific or narrow segmentApproach 2: Differentiation
Advantage Offer customers in niche market something
unique in that marketProduct featuresProduct innovationsProduct qualityCustomer responsiveness
Examples of Focus Strategy
• Focus Low-cost– Ikea: Young furniture buyers who want style at low
cost (price sensitive and low service customer groups)
– Southwest Airlines: Short-haul, point-to-point service between midsize cities & secondary airports in large cities (low pricing & low service)
• Focus Differentiation– Rolex: Serve highest end of wristwatch market
(premium pricing & image) Rolls-Royce: Serving luxurious end of automobile
market (premium pricing & image)
Advantages of the Focus Strategy
The focuser knows its market niche and knows it well
The focuser can stay close to customers and respond quickly to their changing needs
Focuser can develop strong brand loyalty which can be difficult for other competitors to overcome
Drawbacks of Focus Strategy
• Operates in small scale making it difficult to lower costs significantly. Technological advances has minimized this drawback
• Competitors find effective ways to match a focuser’s capabilities in serving niche market
• Niche can become part of the overall market• Segment becomes so attractive it becomes
crowded with rivals, causing segment profits to be splintered
Stuck in the Middle
Happen’s when a firm is not successful in pursuing either a low-cost or differentiation strategy
Occurs when a firm’s Costs are too high to compete with the low-cost leader Products & services are not differentiatied enough to
compete with broad differentiator
Unprofitable strategic position/directionBecoming “unstuck” involves making consistent
strategic decisions about what CA to pursue & doing so by aligning resources & capabilities
NEW PERSPECTIVES ON COMPETITIVE STRATEGY
Integrated Low-Cost Differentiation Strategy Develops CA by simultaneously achieving low-
cost and high levels of differentiationMake an upscale product at a lower costGive customers more value for the money
Technological advancements that make this hybrid competitive strategy possible areFlexible manufacturing systemsJust-in-time inventory systemsComputer-integrated manufacturing systems
NEW PERSPECTIVES ON COMPETITIVE STRATEGY
Advantages of hybrid strategy• Competitive advantage from
•Premium pricing and •Cost efficiency
• Success depends on having the capabilities to•Provide attractive performance and
features, &•Lower cost than rivals
• Can often out-compete both a low-cost provider and a differentiator
NEW PERSPECTIVES ON COMPETITIVE STRATEGY
• Examples of Integrated low-cost differentiation strategy• Toyota & Honda
– Cost reduction through zero defects and differentiation through quality
• Canon– Cost reduction through EOS and
differentiation through design of copiers
• Wal-Mart– Cost reduction through automation and
differentiation through quality (more value)
NEW PERSPECTIVES ON COMPETITIVE STRATEGY
Mintzberg’ s generic Competitive Strategies Differentiation by price Differentiation by marketing image Differentiation by product design Differentiation by quality Differentiation by product support Undifferentiated strategy Mirrors the realities of today’s dynamic
competitive environment
IMPLEMENTING COMPETITIVE STRATEGY
Without implementation, a strategy is nothing more than a strategic idea or plan
Role of functional strategies Using resources & capabilities to create &
exploit CA takes place through the actual strategies that are being used in the functional areas
Have a dual role in determiningWhat competitive strategy is most appropriate?How is the strategy implemented?
Role of Functional Strategies
What is the Competitive Strategy is most Appropriate? Depends on
Current firm resources & capabilities in placeFir resources & capabilities acquired &
developed
Each of Porter’s competitive strategies requires certain skills, resources, & organizational requirements
Role of Functional Strategies
How is the strategy implemented? Strategies must be aligned with functional
expertise Strategy of low-cost
Cost efficiencies -- manufacturing & materials mgt.
Capital investments in technology to reduce costsTight overhead cost control
Strategy of differentiationFunctional strategies must reflect choice
Competitive Postures and Actions
Offensive Moves: Undertaken tobuild new or stronger market positions
and/orcreate competitive advantage
Defensive Moves: Undertaken toprotect competitive advantagereduce risk of being attackeddiscourage the offensive strategies of rivalsBlunt the impact of any attack
Rarely a basis for creating competitive advantage
Offensive Strategic Moves
• Matching or exceeding rivals’ strength (Frontal assault)
• Capitalizing on rivals’ weaknesses• Simultaneous offense on many fronts • End-run offensives (Komatsu’s move to LDC’s)• Guerrilla offenses• Preemptive Strikes (Microsoft’s bundling of
Internet Explorer with Windows 95 & 98)• Acquisition of competitors
Defensive Strategic Moves• Block avenues rivals can take to mount attack
• sign exclusive contracts with best suppliers• patent alternative technologies• broaden product line to match rivals• Keep prices low on models that match rivals • Challenge rivals’ products or practices in regulatory
proceedings (Netscape vs. Microsoft), etc.
• Make clear willingness to fight challengers• Publicly make commitments to maintain market share• Publicly commit firm to policy of matching prices of items
offered by rivals• Maintain excess cash reserves; etc.
• Lower inducement for attack (e.g., Southwest Airlines)
Evaluating & Changing Competitive Strategy
Responsibility of managing strategically involves Implementing competitive strategy Monitoring, assessing, and evaluating
strategy for performance effectiveness & efficiency
Competitive strategies are targeted at increasing sales revenues, market share, or profitability
Data on these areas help determine the impact of competitive strategy
Evaluating & Changing Competitive StrategyChanging Competitive Strategy
Organization’s fundamental competitive strategy is not changed frequently and continuallyEach competitive strategy entails the
development of specific resources & capabilities. To change this is difficult
Major competitive strategic change should be approached realistically & intelligently
Although changing a firm’s competitive strategy isn’t very likely, modifying the competitive strategy is